Journal of Mathematical Economics 46 (2010) 326–331

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Journal of Mathematical Economics journal homepage: www.elsevier.com/locate/jmateco

Efficient, Pareto-improving processes
Kwan Koo Yun
Economics Department, SUNY at Albany, Albany, NY 12222, United States

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a b s t r a c t
We give two optimization programs for determining whether Pareto improving local changes are possible. When they are, the programs compute them. Any procedure generating efficient and Pareto improving changes can be replicated by these programs. The two programs are dual to each other. We apply the programs to Pareto improving exchange processes and to Pareto-improving tax-tariff reforms. © 2009 Elsevier B.V. All rights reserved.

Article history: Available online 28 December 2009

JEL classification: C61 D51 H21 Keywords: Pareto improvement Duality Exchange process Piecemeal tax reform

1. Introduction Tax or tariff negotiations often result in piecemeal reforms. Larger reforms may be considered too expensive economically or politically, and failure to reach an agreement results in the status quo. A reasonable requirement of any agreement is that all participants benefit from it, but when Pareto improving changes are possible, there are usually many of them. An equity criterion may narrow the choices. For example, a large country may argue that it should benefit at least as much as smaller countries. One way to express equity considerations is by specifying the divisions of the total surplus from the change (e.g. the MDP exchange process; Malinvaud, 1972). Alternatively, the divisions of the surplus can be viewed as the outcome of generalized Nash bargaining (Myerson, 1991). In this paper, we formulate two optimization programs reflecting these approaches that characterize efficient piecemeal reforms as their solutions. The programs check whether Pareto improving local changes are possible and generate efficient